The New Trust Filing Rule Could be a Real “Bare” to Deal With

Written by John Grummett FCPA, Tax Partner, Taylor Leibow LLP

There are new reporting rules related to filing of Trust tax returns that become effective for Trusts with a December 31, 2023 year end or later.

These new rules result in two significant filing changes.

New Schedule 15 “Beneficial Ownership Information of a Trust”

Under the first change, all trusts subject to the new rules must file schedule 15, with the trust tax return, for each beneficiary, settlor, controlling person, and trustee of the trust (referred to as a reportable entity) reporting their address, date of birth, tax identification number, and country of residence.

This may create issues in identifying who the reportable entities are.  Under Trust law, the settlor for purposes of settling the trust is generally the person that created the trust.  However, for purposes of the new reporting rules, the settlor can be anyone that has transferred or loaned assets to the trust.  As a result, the trust may have more than one settlor for purposes of schedule 15.

Also problematic is that the new disclosure rules will require schedule 15 to disclose information about all beneficiaries, including contingent beneficiaries. This may include a beneficiary that may not know they are a trust beneficiary, there may be a beneficiary who is unwilling to provide the required information, or there may be unknown beneficiaries at the time of filing the trust return.

Bare Trusts and “In Trust” Accounts

The second change relates to who must file a trust return.  Previously, bare trusts, including bare trust corporations and “in-trust” accounts generally did not file trust tax returns. Section 104(1) of the Income Tax Act excluded bare trusts from filing tax returns, however, the new changes specifically include bare trusts in the filing requirements. In addition, the bare trust must file schedule 15 reporting all of the information noted above.

Bare Trust Corporations are often used in real estate transactions where a bare trust corporation would hold title to the real estate and the beneficial owners would report all income from the real estate.

A bare trust arrangement may also be seen where children are put on title to a parent’s property for ease of administering an estate, or where a parent is required to be on title of a child’s property for mortgage financing purposes.

“In Trust” accounts are often seen where a financial institution requires the parent to be on title of an account where children are under the age of majority.  If the “in trust” account has less than $50,000 in assets and all assets are held in the form of cash, government debt or securities listed on a stock exchange, then the account would be exempt from the new rules.

The December 31, 2023 year-end Trust tax returns are due to be filed by March 30, 2024.  Between now and then, there will be a considerable amount of effort required to identify the trusts which will be subject to these new filing requirements and to accumulate the information required to be reported on schedule 15.